The frustration is compounded when we compare energy regulation to financial regulation. If a bank fails, the FSCS guarantees £85,000 per person. The money is usually back in the account within a week.
Why is there no “Energy Services Compensation Scheme”?
The official argument is complexity. Bank money is simple digital data. It is easy to transfer. Energy accounts involve meter readings, varying tariffs, and physical debt. Also, the banking levy is paid for by the banks, not directly by the depositors (though, of course, banks pass costs to customers).
However, the real reason is likely political will. Setting up a proper compensation fund would require energy companies to pay into an insurance scheme. This would increase their operating costs before a crash, which would raise bills before a crash. Governments are notoriously reluctant to force companies to accrue “rainy day” funds because it makes the current price of services look higher.
Politicians prefer low prices today, even if it means the risk of a massive bill tomorrow. The “we all pay” moment is the tomorrow coming due. We chose not to insure the system, so now we are paying the premiums retrospectively, often with interest.
Chapter 10: The Future – Can We Stop Paying for Others?
As we look forward, the question is: how do we break this cycle? How do we stop the prudent from paying for the profligate?
- Ring-fencing Credit Balances: The most obvious solution is legislation that forces energy companies to hold all customer credit balances in a separate, protected trust account. This money cannot be used for day-to-day operations. If the company goes bust, the trust is released directly to the customers or the new supplier. This would remove the credit balance component from the SoLR costs instantly. It might raise the cost of business slightly (as companies lose access to that free float of cash), but it protects the consumer.
- Strengthening Capital Requirements: Ofgem has started to tighten the rules, requiring more working capital for new entrants. This must be maintained. We must return to an era where energy supply is a utility for the public good, requiring the financial stability of a bank, rather than a speculative startup venture.
- A Dedicated Insurance Fund: The industry should establish a mutual insurance fund. Suppliers pay premiums into a pot. When a member fails, the pot pays for the transfer costs and credit balances. This socializes the cost, yes, but it does so through an insurance mechanism rather than an ad-hoc levy. It makes the cost visible and predictable, allowing companies to price it in accurately.
- Ending the “Challenger” Obsession: The government needs to accept that having 50+ energy suppliers is not necessarily a sign of a healthy market. Energy is a natural monopoly with a thin veneer of competition. The regulatory focus should shift from “encouraging new entrants” to “ensuring resilience.” We need fewer, stronger, more boring companies that don’t go bust.
Conclusion: The Collective Bill
The collapse of the energy market and the subsequent loss of credit balances is a stark reminder of the interconnectedness of our modern economy. There is no such thing as an isolated failure in a utility sector.
When an energy company burns through your credit balance, it isn’t just their failure. It is a failure of the regulatory framework that allowed them to treat your money as theirs. And the cost of that failure is not absorbed by the financial markets or the shareholders who took the risk. It is absorbed by us.
We pay through the hidden levies on our gas and electricity bills. We pay through the taxes used to bail out the giants like Bulb. We pay through the erosion of trust that forces the entire market to become less efficient. We pay through the higher standing charges that disproportionately punish the poor.
“Who pays for lost credit balances?” is a question with a simple, painful answer. We all do. We pay for the lack of foresight, the lack of regulation, and the lack of protection. Until the structural flaws are fixed—until customer money is truly treated as customer money and not company cash flow—the meter will keep running, and the tab will keep growing, landing squarely on the doormat of every household in the country.
The lights stayed on, which is the primary goal of the energy system. But the cost of keeping them on has been a transfer of wealth from the public purse to the wreckage of a failed market experiment. It is a high price to pay for a lesson that should have been learned long before the first company went bust.
Discussion Questions
- Fairness: Is it fair that customers of stable suppliers should pay a levy to cover the debts of failed suppliers? How could this be made more equitable?
- Regulation: Do you believe the government should enforce a “ring-fencing” rule for credit balances, even if it means slightly higher energy bills in stable times?
- Trust: Has the recent crisis changed how you manage your energy payments? Would you prefer to pay in arrears to protect your cash?
- Moral Hazard: How can the market be structured to ensure that company owners and shareholders bear the brunt of failure, rather than the consumer?
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